The UAE’s tax landscape has transformed with the introduction of Corporate Tax (CT) and the Domestic Minimum Top-Up Tax (DMTT). For Free Zone businesses, these changes mean that Transfer Pricing (TP) compliance is no longer just a reporting exercise—it is now central to retaining the 0% Free Zone corporate tax rate.

If you are a business owner in the UAE, understanding how Free Zone tax incentives interact with transfer pricing rules is essential for protecting your company’s financial future.

What Business Owners Need to Know About the Arm’s-Length Principle

The cornerstone of UAE transfer pricing rules is the Arm’s-Length Principle (ALP), enshrined in Article 34 of the UAE Corporate Tax Law.

The ALP requires that all related-party transactions—whether between Free Zone entities, mainland companies, or connected individuals—be priced as if they were conducted between independent businesses in the open market.

For Qualifying Free Zone Persons (QFZPs), compliance with ALP is not optional. It is a statutory condition for maintaining 0% corporate tax status. A failure to comply can result in:

• Reclassification of income as “non-qualifying”
• Application of the standard 9% corporate tax rate
• Loss of Free Zone status for the current year and up to four subsequent tax periods

👉 Read the UAE FTA Free Zone Persons Guide

Why Free Zone ↔ Mainland Transactions Attract Extra Scrutiny

Because Free Zones enjoy 0% corporate tax on qualifying income and mainland companies pay 9%, the FTA carefully reviews cross-zone transactions to prevent profit shifting.

Examples of high-risk areas include:

• Shared service arrangements (HR, finance, IT, legal)
• Intercompany loans and financing
• Intellectual property transfers and royalty payments
• Sale of goods between Free Zone and mainland affiliates

Business owners must maintain robust documentation to prove that such transactions meet ALP standards. Without contracts, functional analysis, or defensible markups, companies face increased audit risks.

👉 Explore UAE Transfer Pricing Guidance

Common Mistakes UAE Businesses Must Avoid

1. Improper Expense Allocation
   Paying the salary of a CEO who manages both Free Zone and mainland companies entirely from the Free Zone entity artificially reduces taxable income on the mainland. The FTA expects costs to be split in line with the actual value provided.
2. Trading at Cost
   If a Free Zone company sources goods and sells them to a mainland affiliate at cost—while the mainland captures all profit—the FTA can reclassify this as non-arm’s length. A proper markup must be applied.
3. Permanent Establishments (PEs)
   Free Zone businesses with domestic or foreign PEs must apply the “separate entity approach.” PEs are treated as independent businesses, and profits must be allocated using functional analysis and arm’s-length methods.

👉 FTA Transfer Pricing Overview

Steps UAE Business Owners Should Take Today

To safeguard Free Zone tax benefits and reduce compliance risks, business owners should:

• Conduct a review of all related-party transactions between Free Zone and mainland entities
• Prepare formal transfer pricing documentation (local file, master file, disclosure forms)
• Use functional analysis to allocate functions, assets, and risks fairly
• Ensure intercompany contracts are clear, detailed, and commercially justifiable
• Apply the “need-benefit test” to all service transactions
• Monitor qualifying revenue thresholds to avoid losing QFZP status

Why Transfer Pricing Benchmarking Matters

One of the greatest challenges in compliance is proving that prices are truly arm’s length. This is where benchmarking becomes essential. Access to reliable market data allows businesses to demonstrate that their policies are consistent with market standards and defensible under audit.

This is where international expertise adds value. Coperitas, a Netherlands-based firm specializing in transfer pricing automation software, helps businesses access accurate comparables and apply consistent methodologies. For multinationals with operations across both Europe and the Middle East, such tools are invaluable in building compliant and practical TP strategies.

By connecting local compliance requirements in the UAE with international benchmarking insights, businesses can strengthen their position against regulatory scrutiny.

References

1. UAE Corporate Tax Guide: Free Zone Persons (Federal Tax Authority)
2. UAE Transfer Pricing Rules – Alvarez & Marsal
3. Transfer Pricing Guide – United Arab Emirates (Grant Thornton)
4. Arm’s-Length Principle in UAE Free Zones – Gulf News